U.S. stocks fall as prices of commodities rise

Crude-oil futures hit $100; gold closes at highest level since 1980

By

KateGibson

NEW YORK (MarketWatch) -- U.S. stocks on Wednesday started off 2008 with a whimper instead of a bang as escalating commodity prices and a gauge of manufacturing activity fueled worries about the economy, propelling the Dow to its steepest start-of-a-year point drop ever.

"As we start off the new year, the first piece of economic data that catches our attention is a disaster, as it shows a slowdown in economic activity; this is no way to start a party," said Art Hogan, chief market strategist at Jefferies & Co.

The Dow Jones Industrial Average
DJIA, +0.34%
fell 220.9 points, or 1.7%, to close at 13,044, after falling as low as 12,991.4 during the session.

The Dow's slide marked its biggest point drop yet for the first trading day of the year, and its largest percentage decline since 1983, when the index fell 1.86%.

Equities enjoyed a brief but short-lived lift after a summary of the Federal Open Market Committee's December meeting offered hopes for additional interest-rate cuts. Read the Fed.

The broader indexes also closed with losses. The S&P 500
SPX, +0.30%
shed 21.2 points, or 1.4%, to 1,447.16 and the Nasdaq Composite
COMP, +0.27%
lost ground for a fourth consecutive day, shedding 42.65 points, or 1.6%, to finish at 2,609.63.

Volume on the New York Stock Exchange hit 1.4 billion, with declining stocks outpacing those advancing about 9 to 7. On the Nasdaq, more than 2 billion stocks exchanged hands, and declining issues outran advancers 9 to 5.

Short-lived lift

The major stock indexes had posted modest gains at the start of the session, but quickly reversed course in the wake of data from the Institute of Supply Management, which reported its manufacturing index for December fell to 47.7, its weakest reading in more than four years. Read Economic Report.

"The ISM was a poor number, showing more weakness in terms of manufacturing last month," said Peter Cardillo, chief market economist at Avalon Partners.

Also troubling was the prices-paid component, which climbed to 68 from 67.5. "We expected a decrease. It doesn't bode well for both the economy and the stock market," said Hogan.

Also tempering investor optimism was an early spike in crude oil that had futures rising above $98 a barrel, fueling concern about energy prices. Crude futures more recently were up $3.69 at $99.67. Read Futures Movers.

Gold futures also climbed, soaring to their highest level since 1980, with the contract for February delivery up $22.1 to close at $857 an ounce. See Metals Stocks.

'High inflation could lead to stagflation in the first quarter.'
Peter Cardillo, Avalon Partners

The rise in commodities, along with the dollar extending its losses, "is certainly putting some jitters into the market. High inflation could lead to stagflation in the first quarter," said Cardillo.

Other developments included a Commerce Department report, which had spending on U.S. construction projects hitting a two-month high in November, rising 0.1% as opposed to the 0.5% drop predicted in a survey of economists. See full story.

Shares of Amazon.com Inc.
AMZN, -0.06%
climbed 3.8% after Citigroup raised its recommendation on the Web retailer from hold to buy.

The credit crunch continued to take its toll, with PHH Corp.
PHH, -0.13%
a provider of residential-mortgage and vehicle-fleet-management services, saying it had called off its plan to be acquired by General Electric Co.'s
GE, +0.97%
GE Capital financing unit. See full story.

In the tech sector, Advanced Micro Devices
AMD, -1.06%
was downgraded to sell at Banc of America Securities on worries about its position in servers as well as growing costs.

And Qualcomm
QCOM, -0.71%
said a judge ruled that it violated certain Broadcom patents and ordered it to stop making and selling certain cell-phone chips. Read more.

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